1 / 9

Theory of Corporate Finance

Theory of Corporate Finance. RWJ-Chapter 1. What is Corporate Finance?. What long-term investments should the firm engage in? Capital Budgeting : The process of planning and managing a firm’s long-term investments Investment opportunities: value vs. cost of these opportunities

cruz-bridges
Download Presentation

Theory of Corporate Finance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Theory of Corporate Finance RWJ-Chapter 1

  2. What is Corporate Finance? • What long-term investments should the firm engage in? • Capital Budgeting: The process of planning and managing a firm’s long-term investments • Investment opportunities: value vs. cost of these opportunities • What do we need to learn? • How can the firm raise money for the required investments? • Capital Structure: The mixture of debt and equity to support long-term investments • What do we know? And Why is important? • How much short-term cash flow does a company need to pay its bills? • Working Capital Management: Capital required for the firm’s day to day activities (current assets and liabilities) • What do we know? And why is it important?

  3. What is our Strategy? • We learn: • The basic tools to answer these questions • Financial Statements • Cost of Equity • Cost of Debt • Project Evaluation • Firm and Bond Valuations • To link these tools in our 3 fundamental questions • Moreover, corporate finance is a very important tool for investments? Why?

  4. Let’s examine these questions in a Balance-Sheet Model The Capital Budgeting Decision Current Liabilities Current Assets Long-Term Debt What long-term investments should the firm engage? Fixed Assets 1. Tangible 2. Intangible Shareholders’ Equity

  5. The Capital Structure Decision Current Liabilities Current Assets How can the firm raise the money for the required investments? Long-Term Debt Fixed Assets 1. Tangible 2. Intangible Shareholders’ Equity

  6. The Net Working Capital Investment Decision Current Liabilities Current Assets Net Working Capital Long-Term Debt How much short-term cash flow does a company need to pay its bills? Fixed Assets 1. Tangible 2. Intangible Shareholders’ Equity

  7. Goals of Financial Management • Maximize the current value of the firm. • How can a financial manager do it? • Identify the best investments • Find the best financial arrangements (i.e., best capital structure) • Who are the owners of the firm? • Shareholders: “Residual Owners”

  8. Agency Problem and Agency Cost • Agency problem exists whenever the principal hires another agent to represent his/her interest • Two types of agency problems: • Between shareholders and managers (equity-related agency problems) • Between shareholders and bondholders (debt-related agency problems) • Agency costs: the costs of devising appropriate incentives for managers and then monitoring their behavior

  9. Agency Problem between Shareholders and Managers • Managerial goals may be different from shareholder goals • Expensive perquisites • Risk aversion (managers might be more risk averse) • Free cash related problems (Hubris) • How can shareholders control managerial behavior? • Directors (Board of Directors) • BOD can devise compensation plan to align the management incentives • BOD can also fire badly performing managers

More Related